Saudi Credit Growth to be Led by Mortgages

Rated banks in Saudi Arabia should maintain stable financial risk profiles in 2020, however growth remains dependent on the dynamics of the oil market and is vulnerable to global economic and regional geopolitical trends. S&P Global Ratings in their report “Banks in Emerging Markets: 15 Countries, Three Main Risks”, notes that the lending growth in the kingdom will be mortgage-led and expects credit losses to stabilize in 2020 at about 70 bps.

The report further suggests that the growth prospects remain linked to commodity prices and are susceptible to adverse changes in the global economic conditions. For Saudi Arabia, credit losses are set to stabilize, aided by the steadying economy and mortgage-led lending growth. The recovery of investment programs and pick-up in GDP growth will likely stabilize the cost of risk for Saudi banks in 2020 at about 70 bps.

Weak growth and muted investment activity in the Saudi private and public sectors have weighed on the contracting industry. Although most problematic exposures have been written off, we do not rule out some volatility in exposure quality. In addition, the outflow of expatriates continues to pressure the property, vehicle markets, and the retail sector.

On the regulatory front, S&P Global Ratings continue to consider the Saudi Arabian Monetary Authority (SAMA) a strong regulator with a good track record. “We note, however, that SAMA has relaxed some regulatory requirements in 2019 related to mortgage lending due to government objectives to increase home ownership.”

“Looking ahead, we think the government’s expansionary budget will be sufficient to boost the GDP growth above 2% in 2020-2021, although credit growth will remain moderate.”

The average long-term rating on banks in Saudi Arabia stood at 'BBB+' at September 30, 2019. This was in line with the outlooks on the banks, which were stable. The average stand-alone credit profile was 'bbb+', one notch higher than the anchor level for a bank operating in the country. This is predominantly owing to the strong capitalization of Saudi banks.